New York State Taxation of Non-Resident Individuals and the Revised Audit Guidelines
By David Donnelly, Senior Manager, Tax & Business
New York State non-residents who earn income from New York sources must generally file a Form IT-203 Nonresident and Part Year Resident Income Tax Return. An example of this is an individual who lives in New Jersey or Connecticut and commutes into New York City for work. That individual’s salary is allocated to New York based on the number of workdays spent in New York during the year. Therefore, it is possible that not all of the income will be subject to tax in New York. This taxpayer then pays tax where the income is earned (New York) as well as in his state of residence (domicile). His resident state will usually grant a full or partial credit for taxes paid to the state where the income was earned to reduce or eliminate dual taxed income.
Sound simple? Maybe. We are seeing an increase in the number of examinations of non New York residents who work in the state and allocate less than 100% of their income to New York. There may be a simple explanation why not all of an individual’s workdays are not in New York. That person may travel for business, work at a location out of state, etc. However, on audit the burden is on the taxpayer to prove his whereabouts on all his workdays the entire year. If the non-New York workdays cannot be proven to the satisfaction of the auditor the taxpayer may be liable for additional tax, interest, and possibly penalties.
So what can a person do? The solution is very easy. Keep good records! A simple calendar may be all you need. The key thing is to make notes every workday of where you worked. If you travel keep copies of your airline tickets, hotel bills, convention receipts, etc. which show where you are. Keep your expense reports and all supporting documents organized.
Non-New Yorkers can allocate their income but may have a serious issue if they maintain or have “unrestricted/unfettered access to living quarters in New York State”. What happens if you live in Connecticut, work in Manhattan but have a “crash pad apartment” in Tribeca? In cases such as this New York State auditors will try to tax you as either a “statutory resident” or a “New York domiciliary”.
What does this mean?
A statutory resident is an individual who is not a New York State resident (e.g. Connecticut is home) but maintains or has unrestricted access to living quarters in New York, (a home or an apartment) who spends more than 183 days in New York (for work and/or pleasure). Even though his home (domicile) is in another state the mere fact that he met this two prong test brings him in as a statutory resident. As a statutory resident, all of one’s income is subject to New York State tax, and not just earned (wage) income. For individuals with large amounts of unearned income such as interest, dividends, and capital gains, the tax due can be staggering. In addition, to the extent a credit in the home state is not available, double taxation may occur. To make matters worse if the person both works in New York City and has living quarters there an additional New York City Resident Tax can apply. Ouch!
What can one do?
Let’s go back to keeping good records. If you are in out and of the State/City keep a contemporaneous date book with receipts. On audit the agent will look at whatever books and records you have. In the absence of documentation showing you were out of the State the presumption will be that you were in. Keep credit card receipts, bank ATM records, etc. If you share a credit card with someone else be sure that the monthly statements list out who made the respective charges. If your statements don’t show this keep the individual credit card charge receipts.
A key consideration becomes whether or not it is worth having that apartment/house in New York. Perhaps it is time to dispose of it. You be the judge.
Remember the burden of proof is always on the taxpayer to show he/she was not in New York State/City for more than 183 days in a given year. Manage you days to avoid missing the 183 day threshold. In a multiple year audit it is possible an individual can be found to be a “statutory resident” in one year and not in the next.
Regardless of where an individual works, travels, etc. he can only have one home. This is his domicile. Where is home? Where do you keep your teddy bear and other prized possessions? Where do your young children go to school? Get the picture?
In a New York State audit it is up to the taxpayer to show he is domiciled outside New York. For example if you moved to Florida but still filed a New York return to report income from sources here, an auditor will want to see what you did to change your domicile.
New audit guidelines state that the burden is on the taxpayer to prove by clear and convincing evidence or he has abandoned the New York domicile and has established a new one. There are several primary factors in this determination:
- Home – Did the taxpayer sell his home or is it on the market? If you rented in New York is your lease up? Can you document your physical move out of New York State?
- Business Activities – We see a number of examinations where individuals once lived in New York but later move to Florida. They continue to have business ties to New York and are still working in the business. It is up to the taxpayer to show that there has been a decrease in ones business ties to show a move.
- Items “Near and Dear” (teddy bears included) – It makes sense that you would bring your treasured items with you when you move. The new guidelines do allow for the exception that some items may not be suitable for your new home. Are you really going to bring a fur coat to Miami?
- Time Spent – It makes sense that if you move out of New York you would spend less time here and more time in your new state. Of course, there are exceptions to every rule but it is preferable to show a decrease in the number of your New York days and an increase in your Miami days.
- Family Connections – The new guidelines hold that the activities and location of your significant other and minor children is a primary factor on where you maintain your home. Watch your loved ones’ activities. Where do your kids go to school? Your family connections can be an important element in establishing a winning domicile case.
Avoiding statutory resident or domicile status in New York requires continued diligence and maintenance of winning documentation. Without documentation supporting non-resident/non-domiciary status, one could be subject to double taxation. Don’t let this happen to you.